Jme/L/LM Commissioner's File: CFC/005/93
Commissioner's File: CFC/005/93
*31/94
FAMILY CREDIT (GENERAL) REGULATIONS 1987
SOCIAL SECURITY ADMINISTRATION ACT 1992
APPEAL FROM DECISION OF SOCIAL SECURITY APPEAL TRIBUNAL ON A QUESTION OF LAW
DECISION OF THE SOCIAL SECURITY COMMISSIONER
Name:
Social Security Appeal Tribunal: Shrewsbury
Case No:
[ORAL HEARING]
1. The claimant's appeal is allowed. The decision of the Shrewsbury social security appeal tribunal dated 11 August 1992 is erroneous in point of law, for the reasons given below, and I set it aside. The appeal is referred to a differently constituted social security appeal tribunal for determination in accordance with the directions given in paragraphs 19 to 23 below (Social Security Administration Act 1992, section 23(7)(b)).
The background
2. The claimant made a claim for family credit on 25 June 1991, in respect of herself, her husband (whom I shall call "Mr C") and their three children. She said on the claim form that she did not work as an employee or as a self-employed person, but that Mr C was self-employed running the business of a shoe shop and shoe repairers for 60 hours a week. On 14 August 1991 Mr C was sent a form FCS 2043 asking for details of the receipts and expenses of the business in the 26 weeks from 25 December 1990 to 22 June 1991, since profit and loss accounts for a period ending in the 12 months before 25 June 1991 were not yet available. Mr C signed that form on 20 August 1990. It is at pages T21 to T30 of the papers before me. I shall have to return to the details later, but the form showed receipts of £21,762.76 and expenses (less non-business expenditure, capital expenditure and a sum taken as Mr C's drawings) of £14,531.85. On that basis, the adjudication officer determined that the profits of the business over the period amounted to £7,230.91, the weekly equivalent being £278.11. After making the prescribed deductions for income tax, social security contributions (but not, initially, for personal pension contributions) that gave a net figure of £217.08. That figure was too high for the claimant to be entitled to family credit and the adjudication officer on 29 August 1991 disallowed the claim.
3. The claimant asked for the decision to be looked at again because she and her husband only drew £109.00 per week from the business. The adjudication officer refused to review the decision. The claimant then appealed against the original decision disallowing the claim. There is some slight confusion as to whether the appeal was against the refusal to review, but it is clear from the dates quoted in the claimant's letter of appeal that it was directed against the original decision on the claim. The adjudication officer's written submission to the appeal tribunal noted that an additional deduction of £5.20 per week from the profits should have been made for Mr C's personal pension contributions of £45.00 per month, but otherwise supported the original decision.
4. At the first hearing before the appeal tribunal on 14 January 1992, the claimant produced accounts for the years to 5 August 1990 and 5 August 1991 from a firm of chartered accountants, together with a covering letter (pages T48 to T52). Again, I shall have to return to the details later, but the profit and loss account for the year to 5 August 1990 showed a profit on the year of £7,534.00 having allowed £1,319.00 for depreciation. The appeal tribunal adjourned for the adjudication officer to review the decision on the basis of those accounts. The adjudication officer prepared a supplementary submission showing a calculation of Mr C's earnings by reference to the year to 5 August 1990 under regulation 15(1)(b) of the Family Credit (General) Regulations 1987. The adjudication officer's calculation included in the gross receipt of the business capital receipts of £903.00. In the expenses for the year, a figure of £1,508.00 was included for the claimant's wages, but £29.00 per week was counted as part of the family's income in respect of her earnings. The adjudication officer calculated Mr C's net weekly earnings from the business at £157.83, which with the claimant's earnings produced a figure of weekly income of £186.83. That, although lower than the original figure, was still too high to lead to any entitlement to family credit.
The appeal tribunal's decision
5. The claimant attended the rehearing of the appeal on 11 August 1992 and gave evidence. The appeal tribunal confirmed the adjudication officer's decision that family credit was not payable. In its findings of fact it said--
"[The claimant] appears to be satisfied with the allowances made by way of expenses from the business and clearly from the audited accounts during the period of the appeal there was a profit shown in respect of the business of Footwear Retailers and Repairers. In addition it is quite clear that in the accounts [the claimant] was in receipt of £29 per week by way of income support which must be added to the gross profit in calculating family credit."
The appeal tribunal accepted the calculations made by the presenting officer that the claimant's income was too high for there to be entitlement to family credit. The presenting officer had submitted that the result would be the same if the capital receipts and an amount of £7.00 Building Society interest were excluded from the profits of the business. The only additional matter mentioned in the appeal tribunal's reasons for decision was that the decision was essentially one based upon fact considering the balance sheet and profit and loss account.
Subsequent proceedings
6. The claimant applied for leave to appeal to the Commissioner, which was refused by the appeal tribunal chairman. The application was renewed to a Commissioner on the ground that the claimant's £29.00 wages had been wrongly included in her income for family credit purposes since it was already covered by the drawings of £5,715.00 shown in the capital account. Leave was granted on 10 February 1993.
7. The adjudication officer now concerned with the appeal, in the submission dated 9 March 1993, submitted that the appeal tribunal had erred in law in treating the capital receipts and the Building Society interest as part of the gross receipts of Mr C's self-employment. That was on the basis that Commissioner's decision CFC/4/1991, which was relied on before the appeal tribunal, that been set aside by the Court of Appeal and that CFC/24/1989 should be followed, with the result that only receipts generated by the activity of the business should form part of the gross receipts of the business. On the matter of the claimant's wages, the submission noted that the calculation of the profit of the business included £1,508.00 for the claimant's wages as an expense. If the wages were not actually paid, that amount would not be allowable as an expense. If they were paid, and the expense allowed, they had under the Regulations to be counted as part of the claimant's income. The adjudication officer annexed to the submission another calculation, this time excluding the £910.00 capital receipts and Building Society interest and allowing the full amount of Bank and professional charges as an expense, giving Mr C's net weekly earnings as £132.56. But that figure, plus the claimant's earnings, would still not lead to entitlement. The submission suggested that Mr C's earnings in the year to 5 August 1990 did not represent his normal weekly earnings at the date of claim and that a new appeal tribunal should consider whether regulation 15(1)(c) of the Family Credit (General) Regulations 1987 should be applied. In her observations in reply the claimant repeated her point about her wages and submitted that the sum of £1,185.00 for rent should not be added to the £62,810.00 for sales because the rent was included in the latter figures.
8. A nominated officer directed the adjudication officer to make a further submission on whether the conditions for the application of regulation 15(1)(c) were satisfied. The further submission, dated 14 September 1993, was that in most cases the best evidence of a self-employed person's normal weekly earnings at the date of claim will be the accounts for the person's normal accounting period. But if there had since the end of the last normal accounting period been a change in the nature of the business or a significant change in trading conditions then the best evidence will be the period after the change. The adjudication officer suggested that Mr C's normal weekly earnings might be more accurately represented by the 26 weeks before the date of claim, which coincided with the period during which his accountant said that turnover had fallen. However, that produced a higher figure than that from the accounts. It was submitted that the Commissioner should give the decision on the appeal, rather than send it to a new appeal tribunal. The claimant replied that since her normal weekly income had been determined to be nil in her claim from February 1992 and she was paid the maximum family credit on the claim preceding the one under appeal there had to have been a miscalculation.
9. A nominated officer then directed that there should be an oral hearing at which submissions should be directed to the interpretation of regulation 15(1) of the Family Credit (General) Regulations. That provided at the date of the claim-
"(1) Subject to regulation 17 (periods to be disregarded), where a claimant's income consists of earnings from employment as a self-employed earner, his normal weekly earnings shall be determined, subject to paragraph (2), by reference to his weekly earnings from that employment--
(a) except where sub-paragraph (b) applies, over a period of 26 weeks immediately preceding the week in which the date of claim falls; or
(b) where the claimant provides in respect of the employment a profit and loss account and, where appropriate, a trading account or a balance sheet or both, and the profit and loss account is in respect of a period of at least six months but not exceeding 15 months and that period terminates within the 12 months preceding the date of claim, over that period; or
(c) over such other period of weeks preceding the week in which the date of claim falls as may, in any particular case, enable his normal weekly earnings to be determined more accurately."
By virtue of regulation 10(1) of the same Regulations the income of a claimant's partner is treated as the claimant's, so that regulation 15(1) applied to Mr C's earnings. Regulation 15(2) applied where a person had been engaged in self-employment for less than 26 weeks, which was not the case here.
10. An oral hearing was held on 18 January 1994. The claimant had indicated that she was not going to attend. The adjudication officer was represented by Miss N. Mallick of the Office of the Solicitor to the Department of Social Security, who made helpful and impartial submissions. It is convenient to mention those submissions as I deal with the various legal issues below.
Was the appeal tribunal's decision erroneous in point of law?
11. I have concluded that it was, as has been agreed by the adjudication officer since the submission dated 9 March 1993. However, that is not directly for any of the reasons put forward by the claimant.
12. I am satisfied that there was no double counting of her wages of £29.00. Although I accept that their annual total of £1,508.00 was included in the drawings of £5,715.00 for the year to 5 August 1990, the amount of the drawings did not enter into the calculation of Mr C's earnings based on the accounts. Under regulations 21 and 22 of the Family Credit (General) Regulations 1987 earnings from self-employment have to be calculated by looking at the gross receipts of the employment and then deducting specified kinds of expenses and amounts for income tax, social security contributions and pension contributions. The amounts that a person draws from the business are not relevant. Wages paid to employees are an allowable expense, and the wages paid to the claimant were deducted from the gross receipts of Mr C's employment in the calculation approved by the appeal tribunal. Then the claimant's own earnings from employment have to be calculated by reference to a consecutive period of five weeks in the six weeks immediately the week in which the claim was made (regulation 14(1)(a), as in force at the date of claim)). The appeal tribunal appears to have looked at the wages paid to the claimant in the period covered by the accounts for the year to 5 August 1990, instead of what was paid in the period immediately before the claim (especially since that is how the wages were treated in the adjudication officer's revised assessment on page T63). But, despite the claimant's answers on the claim form, it appeared not to be in dispute that (as shown by the profit and loss account for the year to 5 August 1991) the claimant received wages of £29.00 per week throughout the two years to 5 August 1991. Thus the appeal tribunal was entitled on the evidence before it to conclude that the claimant's earnings of £29.00 per week should be included in her normal weekly income, but failed to give an adequate explanation of the inter-relationship of the treatment of her wages as an expense of Mr C's self-employment and their treatment as earnings from her own employment or to show that it had applied the legislation correctly. That failure is an error of law.
13. In relation to the other points made by the claimant, I am satisfied that there was no error in adding the rent received of £1,185.00 to the sales receipts of £62,810.00 in computing the gross receipts of Mr C's self-employment in the year to 5 August 1990. Those items are clearly shown as separate in the profit and loss account. The presence of the amount of rent received in those accounts indicates that the rent was produced by an asset used in Mr C's business activities. The fact that the maximum family credit was awarded for the six months preceding and following the six months covered by the present claim does not in itself show that the claimant ought to be entitled to family credit. The circumstances of each claim must be considered separately.
14. In addition to the error of law identified in paragraph 12 above, I am satisfied that the appeal tribunal erred in treating the capital receipt of £903.00 from the sale of personal items and the Building Society interest of £7.00 as gross receipts of Mr C's self-employment in the year to 5 August 1990. On this point, Miss Mallick adopted the adjudication officer's submission dated 9 March 1993. At the date of the appeal tribunal's decision there was a conflict between Commissioners' decisions CFC/24/1989 and CFC/4/1991 on the meaning of "the gross receipts of the employment" in regulation 21(1) of the Family Credit (General) Regulations 1987. The appeal tribunal apparently followed the adjudication officer's supplementary submission to it that CFC/4/1991 should be followed in preference to CFC/24/1989. However, on 21 August 1992 the Court of Appeal set aside the Commissioner's decision in CFC/4/1991 by consent. In the consequent order it was directed that capital receipts not generated by a person's business do not form part of the gross receipts of his self-employment for the purposes of regulation 21. In those circumstances, the approach of CFC/24/1989, which embodies that principle, must be followed in preference to CFC/4/1991, as the only authoritative Commissioner's decision on the point. Since. I have heard no detailed submissions on capital receipts, I prefer not to give any view of my own on the issues involved, but simply set out the current state of the authorities. The £903.00 appears clearly not to have been generated by Mr C's business. It is not entirely clear from the balance sheet and capital account for the year to 5 August 1990 whether the Building Society account from which the £7.00 interest was derived was an asset of Mr C's business or was a personal asset, but in any event the appeal tribunal failed to address the issue properly. If the errors about these receipts were the only ones the appeal tribunal made, they would not have been material, because if the £910.00 was excluded from the gross receipts in the year to 5 August 1990 the claimant's income would still have been too high to qualify for family credit. However, in my view, there were other errors of law.
15. The appeal tribunal determined Mr C's normal weekly earnings by reference to regulation 15(1)(b). That was the only provision put forward in the adjudication officer's supplementary submission to the appeal tribunal. The appeal tribunal did not consider whether regulation 15(1)(c) might be applicable. That was an error of law. Miss Mallick adopted the adjudication officer's submission dated 14 September 1993 on the interpretation of regulation 15(1). That was that sub-paragraphs (a) and (b) are mutually exclusive. Sub-paragraph (a) cannot by its express terms apply where the claimant has provided accounts meeting the conditions of sub-paragraph (b). Where such accounts have been provided, sub-paragraph (b) must be applied rather than sub-paragraph (a). Then sub-paragraph (c) supplies an alternative to either of sub-paragraphs (a) and (b) where the earnings calculated by reference to the period specified are not representative of the person's normal weekly earnings at the date of claim. I broadly accept that submission. It is clear that sub-paragraphs (a) and (b) are mutually exclusive. Which of them is applicable is not fixed at the date of claim, but depends on the circumstances as they are at the date on which the decision on the claim is being made. Although regulation 15(1) does not expressly indicate any order of priority as between its sub-paragraphs, it is also in my view clear that sub-paragraph (c) supplies an alternative to whichever of sub-paragraphs (a) or (b) applies to the circumstances.